For nearly two decades, the defined contribution industry has been embroiled in a vigorous debate over "to vs. through" and which of these target-date fund strategies can best help participants accumulate assets, reduce portfolio volatility and build a foundation for retirement.
The key issues are how much equity sponsors want for their participants — before and after retirement — and how much risk they can tolerate compounded by the fact that research shows there is no clear winner when it comes to long-term returns.
"There are arguments for both cases," said Leo Acheson, director of multiasset ratings for Morningstar Inc., Chicago. "It depends on factors such as risk tolerance, accumulated savings, the presence or absence of other sources of income in retirement, such as a pension. Either can be appropriate depending on investor circumstances."
Boiled down to basics, the "to" strategy starts with a high ratio of equity to fixed income in the years furthest away from a person's expected retirement date. The equity component shrinks over time until the series reaches the landing point — the vintage closest to a person's retirement. At the landing point, the ratio remains fixed permanently.
The "through" approach also starts with the high equity ratio, but at the landing point, the ratio continues to change past the retirement date. The glidepaths' slopes — the changing rate of the equity/fixed income ratio — differ between the two strategies and can differ within each approach.
Both strategies are typically marked in five-year vintage increments, such as a 2030 fund or 2035 fund.
"The 'to' strategy seeks to mitigate the risk of drawdowns near or at a desired retirement date," said Hamish Preston, associate director of U.S. equities for S&P Dow Jones Indices, New York. "The 'through' strategy seeks to mitigate longevity risk."
Although most target-date providers select one strategy, John Hancock offers both. "We give our retirement clients a choice," said Philip Fontana, head of investment product US at John Hancock Investment Management, which offers a "to" series and a pair of "through" series. "It depends on how much equity a client is willing to take." The company has $14 billion in target-date assets, evenly divided between the two strategies.